Turkish inflation dips, but core indicators rise

Ankara/Istanbul, September 3, 2013

Turkish headline inflation fell as expected in August but core indicators rose and could trend higher in the coming months as a weakening lira puts upward pressure on prices.

The consumer price index (CPI) fell 0.10 percent month-on-month in August, in line with a Reuters poll forecast, for a year-on-year increase of 8.17 percent, the Turkish Statistics Institute said in Tuesday.

The producer price index rose 0.04 percent on the month, for an annual rise of 6.38 percent.

But annual core inflation rose and is likely to keep doing so as the pass-through effect of a depreciating lira becomes more evident, economists said.

Among core consumer price indicators watched by the central bank, a measure that excludes unprocessed food products, energy, alcoholic beverages, tobacco products and gold rose to 6.79 percent from 6.49 percent the previous month. Another measure excluding all these items plus other forms of food accelerated to 6.37 percent from 6.09 percent.

"The CPI came in line with expectations but the breakdown of it shows risks regarding inflation are still upwards," said Ali Cakiroglu, strategist at HSBC.

"The depreciation in the lira and rising oil prices will pressure inflation in the coming period. We think annual CPI could exceed 7 percent at year-end."

The Turkish central bank had forecast that headline inflation would start to fall from August onwards, after peaking at close to 9 percent in July. The bank will hold its next rate-setting meeting on Sept 17.

The central bank last month raised its overnight lending rate by 50 basis points to 7.75 percent in a bid to prevent a slide in the lira, prompted largely by worries that the U.S. Federal Reserve may soon start cutting its bond-buying programme.

The lira hit a record low of 2.07 against the dollar on Aug. 28, which is around 15 percent down from its peak this year, after Central Bank Governor Erdem Basci ruled out interest rate hikes to defend the currency.

The bank has sold $7.9 billion at foreign exchange auctions to support the lira so far this year.

"The market is focusing on weak core inflation numbers, and clear evidence now of pass-through from the weak lira," said Timothy Ash, head of emerging market research at Standard Bank.

"Against this backdrop the hope still is that the central bank moves to normalise policy. That does not seem likely still at the moment given Basci's disconcerting comments last week."

Turkey's 10-year benchmark bond yield rose to 10.27 percent by 0943 GMT, from 10.04 percent at Monday's close. The lira slid to 2.0455 against the dollar from 2.0176 late on Monday.

The central bank raised its inflation forecasts for this year on July 30, hiking its mid-point forecast for the end of 2013 to 6.2 percent from a previous 5.3 percent.

Investors have been piling out of emerging markets as the U.S. Fed prepares to wind down its monetary stimulus. Turkey is particularly vulnerable, being heavily dependent on foreign inflows to finance its current account deficit, running at over 7 percent of national output.

The prospect of U.S.-led air strikes on neighbouring Syria has further dampened appetite for Turkish risk, with fears they could push oil prices higher, further increasing Turkey's import bill and widening its current account gap. – Reuters